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Profit Margin Calculator

Profit as a percent of revenue

How it is calculated

Profit margin expresses profit as a share of revenue: profit = revenue − cost and margin % = profit ÷ revenue × 100. Revenue is the selling price or total sales and must be above zero; cost is everything you spent to earn it and can be zero but not negative. Both go in the same currency. The margin is relative to revenue, not to cost, so it can never exceed 100%, and it turns negative when cost is higher than revenue. The profit figure is shown in dollars. Whether cost includes only direct costs (gross margin) or also overheads and tax (net margin) depends on what you enter; the tool does not decide that.

Worked example

A product sells for 8,000 and costs 5,600 to make. Profit = 8,000 − 5,600 = 2,400. Margin = 2,400 ÷ 8,000 = 0.30, i.e. 30%. The tool shows a margin of 30.00% and a profit of $2,400.00. For every 100 of sales, 30 stays as profit.

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Common mistakes

  • Confusing margin with markup. Here profit is 2,400 on a cost of 5,600, a markup of about 42.86%, but the margin is 30% because it is divided by revenue.
  • Entering price and profit instead of price and cost. The second field is the cost; entering the profit there gives a wrong, much higher margin.
  • Adding a percentage to cost and calling it margin. Raising cost by 30% does not give a 30% margin; it gives a smaller one.
  • Mixing gross and net. If cost leaves out overheads, you get gross margin, not the bottom-line margin.
  • Using a price with VAT as revenue. Revenue should be net of VAT, or the margin is overstated.

Sources

About this calculator

Profit margin is (revenue − cost) / revenue × 100 — the share of every sales dollar that's left as profit after covering costs. The calculator also shows the raw dollar profit, since the same percentage means very different things on a $10,000 sale versus a $10 million one.

Business owners use it to price products and compare profitability across different product lines, investors use it to judge how efficiently a company converts revenue into earnings, and it's one of the first numbers checked when comparing two businesses in the same industry, since margin norms vary enormously between, say, software and grocery retail.

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Comments (1)

  • Editorial team

    To work backwards from a target, price = cost ÷ (1 − margin). For a 30% margin on a cost of 70, the price is 70 ÷ 0.7 = 100. Check by running that pair through the tool. Also decide in advance what goes into cost, since direct costs only give a gross margin and the number looks very different once overheads are added. How do you define cost for your products?

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